Occupancy rights in flat conferred by Articles of Association confer ownership rights in flat. Restriction on transferability of flat in Articles of Association is void

Hill Properties Ltd vs. Union Bank (Supreme Court)

 

Hill Properties Ltd, by its Articles of Association, permitted its shareholders to use and occupy flats in the building owned by it. A shareholder mortgaged a flat to secure a loan taken from the Union Bank. As there was a default in repayment of the loan, the flat was attached in proceedings initiated under the Securitization Act before the DRT. Hill Properties claimed that it was the owner of the flat and that the shareholder had a mere right to use and occupy the flat and that the mortgage of the flat was void. The High Court rejected the contention and held that the shareholder had the right to mortgage the flat. On appeal by Hill Properties to the Supreme Court HELD dismissing the appeal:

The right, title & interest over a flat conveyed is a species of property, whether that right has accrued under the provisions of the Articles of Association of a Company or through the bye-laws of a Cooperative Society. Flat owners’ right to dispose of its flat is also well recognized, and one can sell, donate, leave by will or let out or hypothecate his right. By purchasing the flat, the purchaser, over and above his species of right over the flat, will also have undivided interest in the common areas and facilities, in the percentage as prescribed. Flat owners will also have the right to use the common areas and facilities in accordance with the purpose for which they are intended. It is too late in the day to contend that flat owners cannot sell, let, hypothecate or mortgage their flat for availing of loan without permission of the builder, Society or the Company. Neither the Companies Act nor any other statute make any provision prohibiting the transfer of species of interest to third parties or to avail of loan for the flat owners’ benefit. A legal bar on the saleability or transferability of such a species of interest will create chaos and confusion. The right or interest to occupy any such flat is a species of property and hence has a stamp of transferability. The Articles of Association of a Company have no force of a Statute and the right of the shareholder to mortgage could not have been restricted by the Articles of Association (Ramesh Himatlal Shah Vs. Harsukh Jadhavji Joshi (1975) 2 SCC 105 followed).